Sprint gains deep pockets with Softbank’s 70% stake

Originally published October 16, 2012 at 8:00 pm

Updated October 16, 2012 at 10:01 pm

Softbank of Japan is making its biggest gamble yet: entering the U.S. cellphone market.

Softbank’s complex $20.1 billion deal to buy majority control of Sprint Nextel will unite Japan’s fastest-growing cellphone service provider with one of the United States’ most troubled. The idea is to provide Sprint with a stronger, deeper-pocketed partner that can help finance its network overhaul and, eventually, pursue additional mergers. But Softbank, an Internet and communications company, is making a risky wager that it can break the dominance of Verizon and AT&T in the United States the way it did a similar duopoly that long reigned over the Japanese market.

“Softbank brings so much more to Sprint than money,” Sprint CEO Dan Hesse said on an analyst call. “This investment provides the opportunity to benefit from the knowledge and expertise of a leader in mobile Internet technology with a proven track record of challenging larger incumbent carriers.”

Together, the two companies would have $80 billion in revenue and $18 billion in earnings before interest and taxes. And they would nearly double Sprint’s customer base to 96 million, giving the company greater purchasing power.

Softbank’s founder and chief executive, Masayoshi Son, was blunt in his goal: creating the biggest and fastest wireless network in the United States. It is the strategy his own company is pursuing in Japan, aimed at drawing in users of the latest smartphones.

Sprint is only beginning to roll out its next-generation Long Term Evolution network, trailing Verizon Wireless and AT&T.

“U.S. citizens don’t have this experience of high speed,” Son said on the analyst call. “We’re going to bring that to the States.”

Shareholders in Sprint and Softbank appeared less pleased by the transaction. Sprint’s shares closed down slightly Monday, at $5.69, while Softbank’s stock tumbled 5.3 percent, to 2,268 yen ($28.92).

Softbank will initially pay $8 billion to acquire new shares of Sprint, infusing the company with much-needed cash. It will then offer existing Sprint shareholders the chance to cash out some of their holdings for $7.30 each, a handsome premium to the stock’s current levels.

Softbank would gain a 70 percent stake in Sprint, which would remain a publicly traded company. That would give Sprint to raise money or make acquisitions. And it would allow the transaction to close more quickly. The two sides expect it to be completed by the middle of 2013.

The pact signals a belief that more mergers are to come in the rapidly shrinking telecommunications industry. Two weeks ago, Bellevue-based T-Mobile USA announced plans to merge with smaller MetroPCS to create a stronger competitor in low-cost service plans.

As with the Sprint deal, Son has taken risks throughout his career. He founded Softbank as a software publisher in 1981, but he began moving the company into Internet services, partnering with the likes of a nascent Yahoo.

Softbank entered the mobile services business in 2006 by buying Vodafone’s operations in Japan, becoming a distant third to NTT DoCoMo and KDDI.

It is poised to overtake KDDI as Japan’s second-biggest service provider, if a planned takeover of a smaller competitor is completed.